International Misallocation and Comovement under Production Networks

79 Pages Posted: 27 Nov 2023

See all articles by Alejandro Rojas-Bernal

Alejandro Rojas-Bernal

University of British Columbia (UBC) - Vancouver School of Economics

Date Written: October 27, 2023

Abstract

In this paper, I develop a general aggregation theory that explains the role of production networks in country-level TFP. This theory applies to a distorted production network open economy with endogenous factor supply. My main contribution is to provide decompositions for the country-level TFP variation that account for the possibility that factors of production and dividends cross national boundaries. The country-level TFP depends on sufficient statistics that characterize the effect on domestic real GDP from (i) firm-level productivity and markdown shocks in domestic and foreign firms and (ii) variations in the global income distribution. These decompositions do not require quantity measures of variations, facilitating their empirical implementation, as price data is no longer necessary. Additionally, for an efficient economy, a Hulten type of decomposition exists for each country, and the global sales distribution is a sufficient statistic to characterize the first-order propagation of global shocks on country-level TFP. These results support a theory of economic spillovers and contagion through industrial networks, corroborating the essential role of global value chains in creating strong complementarities and commonalities in business cycles across countries.

Keywords: Misallocation, Production Networks, Heterogeneity, Open Economy, Supply Chains

JEL Classification: C67, D24, D33, D57, D85, E25, E32, F16, F20, F41, F42, F62

Suggested Citation

Rojas-Bernal, Alejandro, International Misallocation and Comovement under Production Networks (October 27, 2023). Available at SSRN: https://ssrn.com/abstract=4615604 or http://dx.doi.org/10.2139/ssrn.4615604

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University of British Columbia (UBC) - Vancouver School of Economics ( email )

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